The new American Rescue Plan (ARP) Act provides more pandemic relief to beleaguered taxpayers.

Below are five tax moves for individuals under the new law.

1. Collect economic stimulus payments. Previously, Congress authorized payments of up to $1,200 and then $600 per person. On this go-round, the payments are larger, but the dollar amount is phased out at lower income levels. For single filers, the $1,400 payment phases out between $75,000 and $80,000 of adjusted gross income (AGI). The phase-out range for joint filers is between $150,000 and $160,000. In comparison, for the last round of payments, the upper thresholds were $100,000 and $200,000 respectively. The ARP Act also provides a $1,400 payment per dependent, including adult dependents like a child in college or an elderly relative.   If you don’t receive the full amount you’re entitled to, you can claim a credit on your tax return.
2. Salvage unemployment benefits. The new law extends unemployment benefits for eligible workers with a tax kicker. The final version of the law extends weekly benefits of $300 through September 6. Those benefits were set to run out between March 14 and April 11. More good news, the first $10,200 of unemployment benefits received in 2020 is exempted from federal income tax for folks with a household income under $150,000. Normally, benefits are fully taxable.
3. Boost child tax credit. The new law enhances the Child Tax Credit (CTC) for 2021. Currently, the CTC is available for children under age 17. The maximum credit, subject to a phase-out beginning at $200,000 of adjusted gross income (AGI) for single filers and $400,000 for joint filers, is $2,000. Of this amount, up to $1,400 is refundable. Under the new law, the CTC for 2021 is increased to $3,600 for each child under age six and $3,000 for each child who is at least age 17. Plus, the entire amount is refundable. But the phase-out begins at $75,000 of AGI for single filers and $150,000 for joint filers.
4. Raise dependent care credits. Currently, a couple with an AGI above $43,000 who pay qualified childcare expenses can claim a maximum credit of up to $600 for one child; $1,200 for two or more children. Lower income taxpayers are entitled to a higher credit. The ARP Act increases the maximum credit for many families to $4,000 for one child; $8,000 for two or more children. This higher credit would be fully available to households with an AGI of up to $125,000. However, the maximum credit would be further reduced for a family with an AGI of more than $400,000. These changes are effective only for the 2021 tax year.
5. Reward student loan forgiveness. Generally, forgiveness or cancellation of a loan results in taxable income to the debtor. But prior legislation carved out tax exemptions for student loan forgiveness in certain situations. Now the new law opens for floodgates. No tax may be imposed on forgiveness of both public and private student loans made from 2021 through 2025.

Small Business Tax Strategies
July 2021